A variety of different business structures exist to offer owners higher degrees of flexibility and organization within their company. Deciding on a business’s structure is one of the most important decisions a business owner makes, as it impacts everything from taxes to daily internal operations. Read below to learn about one of the most popular structures–a limited liability company, or LLC.
LLCs Offer Flexibility
Forming an LLC as opposed to other business structures offers superior freedom in a variety of business operations. Specifically, LLC members can choose the tax classification that best suits their company and be taxed as a partnership, corporation, including as an S corporation or C corporation, or sole proprietorship, depending on how they file with the IRS and subject to federal law. This flexibility in taxation gives LLC members more control over the finances of their business, which is especially important in the early stages of company operations.
In addition to tax flexibility, members of an LLC also have more freedom in determining management strategies for their business. While other business structures, such as corporations, have more formal management structures with a board of directors and officers, LLCs can be managed in a variety of ways to best suit the unique business. LLCs also give members more management freedom as the business grows and changes over time.
LLCs Benefit from Operating Agreements
A professionally written operating agreement serves as a clear description of how an LLC functions, reduces ambiguity between management and employees, and limits the risk of future disputes that require litigation. An experienced attorney can help you draft an individualized operating agreement for your LLC that outlines procedures for business operations, capitalization, dispute resolution, transfer of ownership, and other requirements that limits the risk of common disputes that can lead to litigation.
Many LLC owners do not understand the vague language used in form or template operating agreements found on the Internet, and operate the businesses without regard to the terms of the operating agreement. The language of the operating agreement becomes necessarily important when a conflict arises among the business owners and managers. The courts will generally rely upon the language in the contract to govern any dispute. From describing member contributions and responsibilities to expanding on the company policy for distributing profit and debt, an effective operating agreement is a vital addition to an LLC, though it is not legally required in all states.
LLCs Limit Personal Liability
LLCs can decrease the personal liability that members must accept when starting a business. In cases of sole proprietorships or general partnerships, the business owner has no personal liability protection, which means those partners are personally liable for the debts and obligations of their business. With an LLC legally conducting business under a well-drafted operating agreement, however, members are generally protected from this risk, and their personal assets cannot be used to settle business debts, though there is always the risk of losing an initial investment.
Unlike general partnerships, LLCs also offer more protection from any neglectful actions on behalf of a business partner. In general partnerships, one member may be held legally responsible for the fraudulent or neglectful actions of their partner, whether they were aware of those activities or not. LLCs offer more personal liability protection, meaning your personal assets cannot be seized if a business partner or the business itself is accused of negligence.
If you own an LLC or are interested in starting your own business, contact the team at Ritter Spencer Cheng PLLC to find out how you can protect yourself and your company from future business litigation. Many new businesses use online or pre-made contract templates for LLC operating agreements or other contracts without understanding them, and these generalized documents leave room for ambiguity or misunderstandings that can lead to litigation.
With over 25 years of experience in commercial and business litigation, David Ritter has represented clients in a variety of industries and has worked as an aggressive litigator and creative problem-solver to produce favorable outcomes for his clients. If you have questions about establishing your business as an LLC, need a thorough operating agreement, or are looking for attorneys in the Dallas area to work with you in any business litigation case, call the business law attorneys at Ritter Spencer Cheng PLLC at (214) 295-5070.
